Professor Jones asks why, after the Industrial Revolution in the West, “the Rest” struggled to catch up. He does not delve into the causes of the Industrial Revolution nor the reasons it began where it did. Instead he explores the role entrepreneurs and firms played in the modern economic growth since, and posits theories about the policies at the national level which encouraged them. In our mind, it’s akin to the Jared Diamond’s treatment of the development of civilizations in Guns, Germs, and Steel – albeit with a narrower focus.

Discussing his book at HBSWK, Professor Jones argues that the current dominant explanations of global wealth and poverty focus too much on deficient institutions, poor human capital development, geography, and culture, with too little credit given to the “missing gap” between these factors: the entrepreneurs and firms which create wealth and innovation.

In this post we’ll be summarizing his definition of 3 economic eras that followed the Industrial Revolution: The First Global Economy, The Era of Constrained Globalization, and The Second Global Economy. In subsequent posts over the next few days we’ll offer brief synopses of the national-level factors he explores: institutions, the effects of colonialism, human capital, culture, and geography.

The first global economy (1850-1914) locked in the less developed countries (LDCs) as resource providers and reinforced institutional constraints on domestic entrepreneurship. Characterized by:

The LDCs suffered from a “lack of cognition” about “the pace of change” and the opportunities offered by the new global economy.

Faced with colonialism, local politicians often chose strategies to enrich themselves and prevent the empowerment of rivals.

The multinational entities (MNEs) were “disappointing diffusers” of entrepreneurial skills and practices.

The era of constrained globalization (1914-1980) was characterized by two World Wars and the Depression, and the revolt of peoples who had not done so well in the previous decades. Characterized by:

Import substitution regimes of this era resulted in inefficient industries which were sheltered from international markets.

State-led industrialization programs disrupted local firms, blocked or discouraged foreign investment, and were burdened by webs of planning regulations.

Local firms had the incentive to build skills in political contacts rather than technology. This led to corruption rather than innovation.

Capacities were created, albeit inefficient ones.

The second global economy (1980 to the present) has a singular feature: the growth of powerful globally active MNEs from the Rest. Characterized by:

The changing nature of the global economy

Returning diaspora from the West to the Rest

New sources of knowledge acquisition provided by business schools and management consultants